CORRECTED-(OFFICIAL)-UPDATE 1-Weak income, corporation taxes hit UK public finances ahead of budget

Fri Feb 21, 2014 7:17am EST

(Corrects ONS error to show in last paragraph that deficit aim was from December, not March)

* UK public finances show smaller January surplus

* Retail sales suffer bigger than expected drop

* Economists still expect government to hit budget goals

By David Milliken and Andy Bruce

LONDON, Feb 21 (Reuters) - Lower income tax and corporation tax receipts dragged Britain's public finances to a much smaller than usual seasonal surplus in January, as finance minister George Osborne prepares his annual budget.

Strong performance earlier in the financial year means Osborne still looks on track for public sector net borrowing, excluding financial sector interventions and some other one-off effects, to fall broadly as forecast in December.

But the figures mean that Osborne is unlikely to have any large windfall to play with just over a year before national elections in May 2015.

Other figures released by the Office for National Statistics on Friday showed an unexpectedly sharp fall in retail sales in January, which suffered their biggest monthly decline since April 2012 after a strong December.

Sales were 1.5 percent down on the month and just 4.3 percent up on the year - both weaker than expected. The ONS said that weak supermarket sales were the main driver of the decline, and clothes sales dropped sharply too.

British government bond futures fell to a session low after the data, which follows an unexpected fall in inflation and rise in unemployment earlier in the week.

"Official predictions for the annual deficit still look achievable, but nothing better," said James Knightley, UK economist at ING.

Knightley played down the significance of the fall in retail sales, noting that it came after a strong December and might have been affected by very wet weather in January which kept shoppers away from stores.

"With consumer confidence on a strong upward path, employment rising and wage growth starting to show some hints of life, we look for the household sector to contribute strongly to GDP growth this year," he said.

Deficit reduction is a cornerstone of the economic policy of Britain's Conservative-led coalition, which came to power in May 2010 when Britain's budget deficit was 11 percent of annual economic output - one of the highest for a major economy.

Britain's public finances, excluding financial sector interventions, showed a 4.718 billion pound surplus ($7.86 billion) in January, down from 6.035 billion pounds a year ago on a comparable basis - stripping out the effect of a transfer of debt interest from the Bank of England to the government.

Economists had forecast a surplus of 8.15 billion pounds. Income and wealth tax receipts were 5.2 percent lower from a year ago and corporation tax was down around 6 percent.

January is a key month for Britain's public finances, as a disproportionate share of annual income tax and corporation tax is due, causing the budget to usually run a significant surplus for the month.

However, despite the weak performance this January, Britain's strong economic recovery in 2013 means that figures for the tax year that started in April 2013 are rosier.

For the year to date - stripping out the effect of cash transfers from Royal Mail and the Bank of England - the deficit was 90.7 billion pounds, 4.2 percent lower than at the same point in 2013. Government forecasts from December aimed for it to be 3.1 percent lower over the 2013/14 tax year as a whole.

($1 = 0.6003 British pounds) (Editing by John Stonestreet)

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